Archive for September, 2017

There is an underlying context – an underlying business logic – to everything we teach in a Pipeline workshop™. However, since the focus has been on the principles and disciplines of homebuilding production, we have not given that context – that business logic – the attention it deserves; the “what” and the ‘how-to” receive more attention than the “why” and the “want-to”.

So – the newest Velocity Accelerator® is a deeper-dive into context and business logic, into two crucial disciplines that work together, that are inseparable: Open-Book Management and Team-Based Performance Compensation.

The efforts of a homebuilding company to improve operating performance and business outcomes will largely fail to achieve what is possible, if it does not succeed first in creating a homebuilding team that works toward commonly-held and commonly understood business goals, versus being a collection of so-called teammates working toward individual goals.

What would be missing, is an underlying business logic that forms the necessary context for understanding everything else. That is the role of Open-Book Management.

To become the kind of savvy, motivated, mutually-accountable homebuilding team required to compete effectively in the business world, everyone on the team has to learn the “business” of homebuilding, they have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

And – not just understand the business outcome that is at stake; teammates must each have a personal stake in that business outcome. That is the role of Team-Based Performance Compensation.

Open Book Management flows from the work Jack Stack did in the 1980’s as CEO at Springfield Remanufacturing Corporation to rescue this former International Harvester (Navistar) division from almost certain bankruptcy. Following a 99% leveraged employee buyout, Stack opened the company’s books and made it everyone’s business to improve performance.

Stack recounted that effort in two books (The Great Game of Business and A Stake in the Outcome); John Case reported on open-book thinking in other industries and companies, in two other books (Open Book Management and The Open Book Experience).

Then, in Open Book Management, Case described how Steve Wilson developed the basics of OBM-inspired Team-Based Performance Compensation at Mid-States Technical Staffing Services (now Modis); Wilson subsequently described this work in The Bucket Bonus Plan.

We take a specific approach in our application of the principles of Open Book Management and Team-Based Performance Compensation.

We advise our clients to be transparent (open) and to demonstrate candor (the courage to tell and hear the truth) in the constant internal disclosure of operating and financial data, whether in meetings, or through dashboards and heads-up displays. We advise our clients to impart business literacy (understanding) to teammates, so that they understand the business of homebuilding, not just the homebuilding business; we do it through the teaching of business and production principles.

Then – we advise our clients to adopt a team-based approach to performance compensation, by way of a progressively-weighted milestone plan based on achieving targeted performance above a baseline in a specific business outcome that is impacted by the actions of every single teammate. An approach that is simple, easy to understand; visible, transparent; compelling; fast, frequent; self-funding, paid from income the company would not have otherwise generated; based on achieving a target above a baseline.

In terms of compensation – significant, meaningful. In terms of participation – all-inclusive.

Team-Based Performance Compensation should provide only for the possibility of winners or losers, not winners and losers. It should give the right to lead and demand results; it should give the desire to be lead and deliver results.

Savvy. Motivated. Mutually-Accountable. Team.

Come. Participate. Learn.

Open-Book Management and Team-Based Performance Compensation is one of the five Velocity Accelerators® highlighted (together with Critical Chain Project Management, Epic Partnering™, Building Information Modeling, and Business Process Improvement) at the next Pipeline workshop™, October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

(originally published on EFA® in February 2010 under the same title; updated and republished in April 2013, as part of our retrospective Above Average: The Best of Escape from Averageness®, 2009-2012; published again here, as part of the explanation of a new Velocity Accelerators® for the upcoming Pipeline Workshop™ No. 8)

McKinsey and Company

The intrepid, results-based consultant shook her head, partly in amusement, partly in disbelief. It was another sobering reminder that RB Builders, early in this process, was capable of coming to bewildering conclusions, the latest of which centered around the company’s team-based performance compensation plan.

The Gross Income Participation Pool, or GIPP, was a prerequisite – une condition nécessaire – to her firm agreeing to become involved in a client-consultant partnering arrangement with RB Builders in the first place; it was, in fact, one of a set of three stipulations, which included a requirement that the company’s internal financial statements reflect a variable costing approach, and a requirement that any existing improvement initiatives be subordinated to the company’s new constraint-focused, rapid-results process of continuous improvement.

The GIPP was new. It was supposed to replace the company’s longstanding practice of paying individual bonuses based on multiple measures, and consisted of a team-based approach focused on performance related to a single business outcome, specifically, increases generated in Gross Income above a specific baseline.

Under the GIPP, the baseline performance was referred to as the Gross Income Baseline, while the budgeted performance was dubbed the Gross Income Target. The difference between the GI Baseline and the GI Target was referred to as the Gross Income Reserve. The GI Reserve was scheduled to be paid out progressively, based on the achievement of a predetermined number of “bonus buckets”, called Gross Income Milestones. The aggregate teammate share of the GI Reserve represented one-third of the GI Reserve, while the remaining two-thirds was allocated evenly between distributions to owners and retained earnings.

Now, however, the GIPP was getting push-back from one of RB Builders’ recently-hired Regional Vice Presidents. In fact, he was advocating that the plan be canceled.

“The market has improved, but we still have credit facilities that we have to restructure, repay, and replace, and now we need land and building lots; bottom-line, we need the cash”, he explained.

In the intrepid, results-based consultant view, the Gross Income Participation Pool was a well-established prerequisite; it was too late in the planning schedule to consider changing it, let alone cancelling and replacing it.

The intrepid, results-based consultant was having none of it.

“Where did you get this idea?”, she asked.

“It is the best approach to a situation that remains very challenging and uncertain”, he replied. “We cannot justify bonuses in this economy, in this housing market. We are fortunate to have our jobs. We have nothing against bonuses in better times, just not now.”

“So, you just want to cancel the GIPP? YOU CANNOT BE SERIOUS!”

“McEnroe”, said the CEO. “Nice impersonation.”

The intrepid, results-based consultant turned towards the CEO, her impassive facial expression nevertheless clearly communicating her thought: “Where did you find this guy?”

She turned her attention back to the Regional VP.

“Let me get this straight. You are concerned that your division will be unable to meet its debt service obligations, or find land, if it rewards performance above its baseline?”, she asked, rhetorically. “Really? Where is the money supposed to come from?

“The GIPP will not have paid out anything unless there is a reserve created by performance that exceeds the baseline. You do realize that the GIPP is completely self-funding, that it does not cost the division or RB Builders’ owners one-red-cent?

“You do understand that, right?

“For the most part, all of the land and building lots acquired are kept off-balance sheet. With in-place limitations on work-in-process and management controls on non-variable expenses”, she continued, “is there any likely scenario under which additional Gross Income will result in less cash flow? On baseline alone, RB Builders is profitable, operating above breakeven, correct? So – is there any likely scenario under which every cent of that additional Gross Income will not drop straight to the division bottom-line? Where it can be utilized for – oh, I don’t know, say – debt restructuring, or distributed to teammates and owners before it became retained earnings?

“I can understand being careful with important decisions in uncertain times. I can understand increased diligence in determining a baseline that reflects current reality. I can understand having a more progressive structure to the payouts, so that each successive milestone is worth more. I can understand adjusting the distribution of the reserve between teammates, owners, and retained earnings, to 25-25-50, or 30-30-40, instead of equal shares, in order to provide more money to meet extraordinary debt service requirements. I can understand – but not agree with – the fear that would drive your flight to a supposedly-safer outcome, like Net Income.

“But, to deny yourselves – you, your teammates, your owners – the opportunity and motivation to do better? To preserve your shared livelihoods? To secure your collective futures? That, I do not understand.

“The absence of business logic is simply astounding.”

Come. Participate. Learn.

Open-Book Management and Team-Based Performance Compensation is one of the five Velocity Accelerators® highlighted (together with Critical Chain Project Management, Epic Partnering™, Building Information Modeling, and Business Process Improvement) at the next Pipeline workshop™, October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

A few weeks ago, between a series of meetings with a homebuilder client, I was asked if I wanted to try out their virtual reality prototype, which involved me donning a pair of heavy goggles and clumsily shuffling around within a 10’ x 10’ open space. The open space, of course, was reality. But, what I was seeing through the goggles was the living room of one of their best-selling house plans.

On the horizon was a beautiful, scenic mountain range, which could be easily enjoyed from the fashionable L-shaped couch that I was virtually standing beside. From a stationary position, I could rotate in a 360° circle to see the kitchen, covered porch, downstairs bathroom, stairs, and the entrance to the first floor master bedroom.

From the master bedroom, I could walk around the bed, check out the master bathroom, and even take another look at that mountain range. Perhaps the coolest part of this experience came from the upstairs hallway, where I could approach the banister of the stairs, bend at the waist, and see the downstairs foyer.

While not available on this particular day, the ultimate end product will include the option to change everything from the color of the walls to the structural layout of the house. You’ll be able to build your dream home and experience it, just at the small price of wearing a bulky set of goggles.

We are closer to this world than you may think.

Pulte recently announced a new virtual reality experience at divisions in Florida and New York that allows the potential buyer to virtually walk their new home. The buyer even has the option to plug the goggles into their Smartphone and experience their new home from any remote location.

Discussions on how to apply new, innovative technology (like VR) is making its way to the top of every meeting agenda in the big builder world. While these discussions have historically led to little action, look no further than Pulte’s investment in VR to see that times are changing. As my partner and CEO of Continuum Advisory Group, Clark Ellis, recently said in an interview with “BUILDER”, “Everything is moving toward experiential learning and experiential entertainment…the hardware is getting there, and the software is getting there, so it’s only a matter of time.”

So what about BIM?

Looking back over the last 20 years in the residential homebuilding industry, this also belongs in the bucket of “all talk, little action”. However, based on Continuum’s interactions with various public and private builders of all sizes, this too is changing.

To clarify, the overall lack of mass acceptance of BIM has nothing to do with its underlying value or functionality, mainly due to advancements in the software. The problem is an overall lack of awareness of the opportunities which it creates. The industry as a whole, with the exception of the roughly 10% of U.S. homebuilders that are using BIM technology to drive their business operations, is mostly unaware of the value that can be created with a well-organized, properly planned BIM implementation.

In other words, most homebuilders are unprepared and unequipped to understand and appropriately analyze their total potential return on their BIM investment, or their “ROBIMI” (ROBIMI, or Return on BIM Investment, is a term that Continuum uses to communicate the potential benefits of BIM). Without a proper understanding of the benefits, most homebuilders will succumb to the all-too-common “we’re too busy” or “it’s too expensive” reaction.

SAI Consulting’s Fletcher Groves III and I are ready to change the narrative. We’re ready to build a new level of awareness.

For the upcoming Pipeline Workshop™ in Ponte Vedra Beach, Florida (April 5-6, 2017), we are excited to announce the addition of a new BIM Velocity Accelerator®. We’ll share the “not-so-well-known benefits” of BIM, and why you should be acting with a sense of urgency.

There is a line being drawn in the industry: on one side is present day, where BIM remains a potential competitive advantage if properly implemented; on the other side is some period of time in the future, where BIM will shift to being an investment that is necessary just to keep up with your competitors.

When will the industry shift to the other side of the line? One year from now? Three years from now?

Join us for the debate at the next Pipeline Workshop™.

See you in April!

Come. Participate. Learn.

Building Information Modeling is one of the five Velocity Accelerators® highlighted (along with Critical Chain Project Management, Epic Partnering™, Business Process Improvement, and Open-Book Management and Team-Based Performance Compensation) at the next Pipeline workshop™, October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

One of the areas we single-out for deeper discussion in a Pipeline workshop™ – what we call Velocity Accelerators® – deals with the imperative of replacing the current method used to schedule jobs; actually, the current method used to schedule a portfolio of jobs.

The nature of the workflow in homebuilding production is project portfolio management. Yes, there is workflow performed in processes, but those processes are generally embedded, enabling, and supporting; process workflow is different than project workflow. The process of building a home – what we call the Start-to-Completion process – is actually the management of multiple projects that share resources. It is the structuring and the management of a portfolio of job schedules, with interdependencies and interactions of tasks and resources.

The current method of project scheduling is known as the Critical Path Method (CPM), which evolved from the Program Evaluation and Review Technique (PERT) in the 1950s; it has been in existence for more than sixty years; it is the method used in every homebuilding ERP suite.

PERT and CPM were designed for programs with large, complex structures (Polaris weapons system, Manhattan Project), but the Critical Path Method has become the de facto standard for scheduling all types of projects: aerospace/defense, software development, product development, research, and – yes – construction.

The problem with CPM is that it was not designed for managing a portfolio of projects, and it was not designed to function in environments where velocity is important, where faster cycle time and higher inventory turns are critical drivers of business outcomes.

Where it must contend with variation and uncertainty, CPM offers only a buffer of additional time – individual task durations lengthened to protect the completion date of each task, but not necessarily the completion date of the project.

For the most part, builders are oblivious to the effects of variation on their production system. The cost of variation is always the same: it is the Gross Income lost from all of the closings that never occurred, from houses that were never built with the capacity they paid to have; for a profitable builder, it is Gross Income that would have become Net Income, and ultimately, Net Profit.

It’s a lot of money.

Moreover, CPM considers task dependency (the predecessor-successor relationships of tasks) in its work breakdown structure, but it does not resolve resource contention; it does not consider situations in which tasks of different projects/jobs depend on the availability of resources that do not have sufficient capacity to meet the demand being placed upon them.

These two factors – dealing with variation and resolving resource conflict – should be anathema to builders.

CPM was not designed to contend with the production environment homebuilding presents. It is not the problem (the problem is variation and resource conflict), but CPM is benign to the solution. ProChain Solutions’ Rob Newbold (Project Management in the Fast Lane) told me that he would go further, saying: “CPM supports values that perpetuate the problems of homebuilders.”

Which brings us to Critical Chain Project Management.

Developed in 1997, Critical Chain addresses task dependency and resource contention, and it replaces padded durations intended to protect task completion dates with buffers that protect the completion date of the project/job; CCPM is much more aware of system constraints. Most importantly, Critical Chain reduces the duration of projects – the cycle time of houses under construction.

RB Builders’ newly-acquired division has a construction schedule of 120 calendar days, but its actual cycle time is 180 calendar days. There is wide agreement that it should be able to build its homes in far-less than 120 days, because the schedule reflects “highly certain” task durations. Switching from CPM to CCPM would immediately reduce the schedule from 120 days to 96 days, cutting the schedule by 20% with no diminution of confidence; it would reduce the actual 180 day cycle time by almost 50%.

Critical Chain Project Management does more than just reduce the length of construction schedules. It also specifies a set of rules preventing behaviors that consume (and waste) the safety built into task durations. It installs a release mechanism that pulls starts into the system and keeps work-in-process at the levels required to produce faster cycle times.

It implements simple, visual tools to manage production.

Builders can put a number of these practices into place without changing the scheduling algorithms from Critical Path to Critical Chain. Critical Chain will not be a complete solution until management technology wakes up and addresses it. But – it all starts with knowledge.

Come. Participate. Learn.

Critical Chain Project Management is one of five Velocity Accelerators® (along with Business Process Improvement, Epic Partnering™, Building Information Modeling, and Open-Book Management and Team-Based Performance Compensation) that will be explored at the next Pipeline workshop™, October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Delivered by SAI Consulting and Continuum Advisory Group. Sponsored by BUILDER and BuilderMT.

(this entry has been shared, or posted on Escape from Averageness®, every year on the anniversary of the 9/11 attacks)

On Tuesday morning, September 11, 2001, sixteen years ago to the minute, I was in the offices of Fidelity Homes, in Venice, Florida, commencing a process mapping engagement to give this start-up homebuilding company a state-of-the-art set of business processes. SAI Consulting’s involvement was part of a large pro bono effort, sponsored by Professional Builder, that included a number of top consultants then serving the homebuilding industry.

I was the Process Architect for Fidelity Homes.

Sitting across the table were David Hunihan and Todd Menke, two young builders, eager to take their experience in homebuilding and pursue a National Housing Quality award. We had barely started, when David was pulled away by a telephone call. It was his wife, Lauren, asking if he was aware of what was going on in New York City.

As the events continued to unfold, in New York City, in Washington DC, in western Pennsylvania, we finally decided that it was impossible to focus on mapping workflow, and whatever we were doing did not seem all that important, anyway. We cancelled everything for the rest of the day, and, in our own ways, watched and tried to process what was happening.

Bill Lurz, then a senior editor at Professional Builder, joined us the following day. We finished the project two days later, and I drove back to my family in Ponte Vedra Beach through a tropical storm. On that day, the welcoming embraces had particular conviction.

The article was written and published in Professional Builder. The full story of Fidelity Homes was told in a six-part series on Escape from Averageness® in 2011, coinciding with the tenth anniversary of the 9/11 attack.

I still consider the events of 9/11 to be a matter of unfinished business for this country. Time has only increased my feelings about it. We were attacked, fifteen years ago, because of who we were, because of who we unapologetically remain. Our enemy sees it as unfinished business, as well.

Evil is the enemy of good; that evil has an ever-more-radical, and now secular, face. In the presence of that evil, we have failed to clearly state what war is; we have dismissed the understanding of war as the utter and complete destruction of an enemy.

It doesn’t matter what we think of issues like American Exceptionalism, our place in the world, the tradeoff between national security and the constitutional rights to privacy of US citizens, the threat of terrorist attacks on our own soil, the still-unaddressed murder of US diplomats and security personnel in Benghazi, the ramifications of decisions not to intervene in Iran and Syria, the emergence of ISIS, the question of what happens when Iran becomes a terrorist regime with nuclear weapons, or the question of how long we wait on North Korea to change its taunts into action.

The discussions on all of those matters miss the point.

The discussions miss the point, because they don’t address the root cause of the problem. The core problem is not the threat of future terrorist attacks or rogue regime nuclear attacks. The problem is the terrorists and their sponsors; the problem is rogue nuclear regimes and their enablers.

And, the solution is not attrition, or containment, or control, or minimization, or dismantlement of the threat, or mounting an international coalition against terror, or imposing sanctions, or providing more humanitarian aid, or granting political asylum, or creating deeper understanding, or negotiating peace, or peace, itself.

It is true that Christians are told to love their enemies. It is also true that love and forgiveness do not remove consequences, and that scripture is filled with instances when the children of God were instructed to destroy their enemies. And – yes – the One, True God, in His righteousness and omnipotence, may decide to impart His own justice to this situation.

However – absent divine intervention – we cannot afford the “problem of conjecture”, as Henry Kissinger described it. We have now assured ourselves that there will be a war; if not a nuclear war, then certainly a war over who will have nuclear weapons. Competitors that already have nuclear weapons no longer fear us; the ones that will obtain them will not fear us, either. We are now in a far more dangerous, more deadly situation than we were in the aftermath of 9/11.

“Fleury. Tell me what you whispered to Janet, in the briefing, to get her to stop crying about Fran, you know, before all this, before we even got airborne. What’d you say to her? You remember?”

Pipeline Workshops™

Pipeline Workshops™, sponsored by BUILDER and BuilderMT, are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines, focused specifically on homebuilding production management.